Eurozone Solution: Aaah, So That's How They're Trying To Do It!

... Recall, the basic short term problem is that finance is fleeing eurozone banks, thereís a tremendous credit crunch going on. This is roughly what happened in 1930/31 and led to the Great Depression. We would really rather not go through all of that again. The solution is well known. The European Central Bank should simply print euros and buy up the debt of the peripheral nations. Very much like the quantitative easing by the Federal Reserve and the Bank of England.

However, the ECB isnít allowed to do that so we canít do that. So, what can we do? ...

... So, hereís a rough sketch of what will now happen. Umm, OK, no, hereís a rough sketch of what the plan is intended to be, assuming that the plan works.

So, we have governments that have huge piles of debt that they need to sell. The ECB is not allowed to buy this debt nor is it allowed to buy old debt to lower the issuance price of new debt. Banks desperately need a source of medium term funding as everyone other than those stuck in the eurozone is pulling their money out of it. So hereís how we do it.

The ECB agrees to lend very cheap money to any bank that asks for it. Sure, theyíve got to put up some collateral to get it but guess what the acceptable collateral is? You guessed it, sovereign bonds. So, banks buy Italian bonds on which they get 7% interest (ish, at present) present them to the ECB and get money at 1%. Recycle this process as many times as you like and the net effect is that the ECB is printing the money to purchase government bonds, using the banks as intermediaries.

Weíve a nice side effect too. The eurozone banks all desperately need more capital. One very useful source of new capital is retained earnings. And if you can borrow at 1%, lend at 7%, thatís a good source of such retained earnings. Providing no one goes bust of course.

1. From 'Currency Wars'

I just read this this morning in James Rickards new book 'Currency Wars':

"The interesest of the bureaucrats in Brussels were perhaps most insidious of all. If the European sovereign debt crisis resolved itself, everyone would praise the success of the euro project. If some European sovereign debt failed, the bureaucrats' solution would be more, not less, oversight from Brussels. By turning a blind eye to recklessness, Brussels had constructed a no-lose situation. If the euro succeeded they won praise and if the euro came under stress they won power." (page 116-7)

And that is precisely what is happening -- more concentration of power into the hands of bureaucrats beholden to the international, corporatist elite one percent.